Children as income-producing assets: the case of teen illegitimacy and government transfers.

• Author: Clarke, George R.G.

1. Introduction

   The assertion that economic considerations play a significant role in family formation and fertility decisions is neither new nor controversial. The observation that there is a systematic interplay between economic considerations and fertility dates at least to Malthus (1798). In his Essay on Population (1798) and Summary View on Population (1830), he provided a series of conjectures and empirical evidence in support of the view that agricultural productivity provided an overall restraint on the positive and negative influences on birth rates. Subsequently refined and debated, the classical theory of population was summarized by Blaug (1978) as the proposition that

   . . . the production of children, [is] not as a means of spending income on "consumer goods" to acquire satisfaction, but as a method of investment in "capital goods" for the sake of a future return. (Blaug 1978, p. 78)

   While this classical view has been adequate for loosely explaining population dynamics in agrarian societies, the modern economic theory of the family, due mainly to Becker (1991), views children as primarily a consumption, rather than an investment, good.(1) Undoubtedly, across most of the range of the income distribution in industrialized economies, the consumption view of children is the more suitable and powerful explanation. However, for individuals in poverty, various public cash and in-kind transfers create a series of economic incentives which, as we shall develop below, make the childbearing decision equivalent to the Malthusian analysis that children are income-producing assets as well as sources of utility. In the modern welfare state, it is the transfer system, rather than agricultural production, that creates income-producing opportunities.

   The growth in public transfers has been accompanied by a sizable empirical literature in sociology and economics on the interaction between various family formation decisions and the welfare state. In general, the empirical evidence, from studies that have used differences in welfare benefits across time and across states to test whether the welfare system encourages illegitimacy, is inconclusive.(2) One possible reason for the mixed results is that illegitimacy might affect per recipient benefits either directly, due to voters' concerns about illegitimacy, or indirectly, because it affects the size of the state's welfare population. Increases in the size of the welfare population increase the cost to voters of providing a given level of benefits and, therefore, might cause voters to reduce per recipient benefits. In either case, benefit levels and illegitimacy are codetermined.

   Once we control for this endogeneity, we find strong evidence that welfare has a large and statistically robust effect on illegitimacy. We find transfer elasticities with regard to teen illegitimacy rates on the order of + 1.3 and +2.1 for white and black teens, respectively. In addition, we find own wage elasticities with regard to teen illegitimacy rates on the order of -0.4 for white teens and that own wage elasticities are not significantly different from zero for black teens.

   We focus specifically on the effect that welfare has on out-of-wedlock teen fertility for several reasons. The first is that, although few Aid to Families with Dependent Children (AFDC) households are headed by teenagers (only 3-4%), a much larger proportion are headed by women who were teen mothers (around 40%) (General Accounting Office 1994). A second point is that teen mothers tend to be less educated and spend more time on AFDC than other participants.(3) Finally, about half of unwed teen mothers become welfare recipients within two years of the birth of their first child (General Accounting Office 1994). Overall, unwed mothers are likely to enter the AFDC program, and once this happens, they are in the program longer than older women.

   The organization of the paper is as follows. Section 2 presents a brief review of empirical modeling considerations arising from the literature and some stylized facts. Section 3 develops and explores a formal economic model of the dependency decision. A young, fertile teenager is viewed as facing the choice to (i) complete her education and seek work or get married or (ii) have a child and thus gain access to AFDC, food stamps, Medicaid, and housing and energy assistance. Section 4 discusses the data collected to test the model and econometric modeling considerations. Section 5 presents and summarizes the empirical results, while section 6 concludes. Also, Appendices A and B contain, respectively, data definitions and sources and a discussion of sample size in other studies of teen illegitimacy that use individual-level data.

2. Some Stylized Facts on Illegitimacy and Welfare

   Much of the recent concern about the effect of welfare benefits on illegitimacy has been stimulated by the large increase in births to unmarried women since the end of the Second World War. The number of illegitimate births per 1000 single women of childbearing age has nearly tripled over the past 40 years and has more than tripled among teens [ILLUSTRATION FOR FIGURE 1 OMITTED].

   It is commonly asserted that the increase in illegitimacy has been caused by welfare benefits encouraging, or at least allowing, single women to bear children out-of-wedlock. The objection to this conjecture is that, in real terms, the welfare benefits available to single mothers have not grown continuously over this period. One measure of the value of welfare benefits, the combined value of AFDC and food stamp payments to a family with no other income, grew slowly in the early 1960s and then faster through the mid-1970s.4 However, since the mid-1970s, benefits have been flat or declining in real terms. Moffitt (1992) notes this stagnation makes it unlikely that changes in welfare benefits alone explain the rapid growth in illegitimacy.

   This does not mean that benefits have played no role in the increase in illegitimacy. Even if the real value of welfare benefits has not been growing continuously, it might have been growing relative to other economic opportunities available to the young woman. In A Treatise on the Family (1991, p. 16), Becker observed that

   . . . my analysis of the marriage market indicates that the incentive to remain single depends upon income while single relative to income expected if married. The real wage rate of young male high school dropouts and the lowest quartile of graduates has dropped by more than 25% over the past 15 years and these young men may have become less attractive marriage partners for other reasons as well.

   Welfare might have interacted with other variables to cause the rapid growth of illegitimacy, even if it is not the only, or even the main, contributor to the growth.

   Looking at changes in illegitimacy and welfare benefits over time is one way of testing the relationship between the two. Another is to take advantage of the federal system where states set their own AFDC benefit levels.(5) As Murray (1993, p. 225) notes, this variation appears to ". . . provide a natural experiment for testing the proposition that welfare is linked to family breakup." If welfare were the primary cause of the increase in illegitimacy, then states with higher per-recipient benefits might have higher illegitimacy rates since women in those states might be more likely to give birth out-of-wedlock. Many studies have exploited differences in benefits across time or states, using discrete choice models to test whether welfare benefits affect the probability that an unmarried woman has an out-of-wedlock birth or to test the aggregate relation between benefit levels and the state's illegitimacy rate. However, empirical work exploiting these differences has not been conclusive. Some studies have found modest positive relations (e.g., Ozawa 1989; Caudill and Mixon 1993), many others have found mixed or statistically insignificant positive results (e.g., Duncan and Hoffman 1990; Lundberg and Plotnick 1990; Acs 1993), and others have even found negative correlations among their results (e.g., Ellwood and Bane 1985). In a recent paper, Rosenzweig (1995) finds that high AFDC benefit levels increase the probability that a woman will give birth out-of-wedlock before her 23rd birthday, especially for women who grew up in low-income households. Moffitt (1992) summarizes various studies written between 1982 and 1990 on the effects of welfare benefits and concludes that there is only "mixed evidence of an effect of the welfare system on illegitimacy." Murray (1993) and Acs (1993) examined other studies and reached the same conclusion.

   However, differences in per-recipient benefits between states and across time are not the result of a natural experiment. Ellwood and Bane (1985) and others note that the state's benefit level is not set independently of the social and political structure of the state.(6) First, as noted by Ellwood and Bane (1985), omitted or perhaps unmeasurable state attributes might affect both the benefits the state offers single parents and encourage, or discourage, single motherhood. If these traits are omitted, the estimated coefficient on benefits will be inconsistent; this criticism applies equally to individual and aggregate studies. If these traits are (more or less) constant for a given state over the period studied or (more or less) constant across all states for a given time period, then state (or time) dummy variables in a regression analysis will control for them. However, illegitimacy rates might also affect benefit levels directly, either due to voters' concerns about illegitimacy or because they affect the size or composition of the state's welfare population. The public choice literature on how states set welfare benefits (e.g., Orr 1976) shows theoretically that the size of the welfare population (relative to the number of taxpayers) increases the price of per-recipient benefits...